What is a "dividend"?
Only certain types of life insurance companies issue dividends. They're usually issued by what's called "mutual" life insurance companies. When life insurance companies started many years ago, they were usually "mutual" companies. That meant that the policyholder owned a piece of that life insurance company. It might be a very small piece, but it was relative to their policy size. Because these companies made a lot of money, and because the policyholders are really cared for, the board of directors would say, "We made an extra $27 million. We're going to give it back to the policyholders in the form of a dividend." In a life insurance contract, a dividend is non-taxable. It's not even required to be declared on your income tax return. A dividend is a return of premium. If an insurance company is making lots of money and they want to stay competitive in the industry, they will say, "We have made so much money, let's give it back to the insureds. They will be more loyal to us. They'll buy more insurance from us. They will refer us more business." A dividend is basically a return of premium. It's not guaranteed. Some companies have been historically paying dividends every year for 15 years, and then, all of a sudden, they get hit with major losses. Then they say, "This next five years, we will not be able to pay any dividends." But it doesn't mean that they won't start again at a later date. In general, life insurance rates have come down, and insurance companies typically have been so profitable. They're profitable because, when they issued insurance 40 years ago, the average insurance age, the average death benefit age, was something like 65. I can remember saying my father, when I was a young boy, "How long are you going to live?" and he said he'd be happy if he lived to 60 or 65. He lived to 90. Today, people are living longer and longer. If an insurance company does not have to pay a death claim for an extra 30 years, that is profitable. They're able to keep the money in their own coffers, so to speak. If it's a mutual company, and they care about their policyholders, they will pay that surplus, that return of premium, to the policyholder. That's what a dividend is.
